Multi asset products are one of the top themes for European investors since nearly two years now. With net sales of €54.3 billion over the first nine month of the year, asset allocation funds have become the best selling asset type in 2014 so far.
As within other parts of the industry the flows within the asset allocation peer group are highly concentrated, since the sixteen best selling products were able to gather more than €1 billion each, accounting for €30.01 billion or 55.25% of the overall flows.
Table 1 Top 25 Asset Allocation Funds by Estimated Net Sales January 1. to September 30, 2014
Source: Lipper FMI
The success of these products has risen some questions by analysts and market observers, since not all funds might be able to deliver what they have promised to their investors. With regards to this, it might be useful to have a closer look on what a multi asset fund is.
As described by the name a multi asset fund should invest in more than one asset class, i.e. at least in bonds and equities. Since all mutual funds do normally also hold some cash, mainly all funds from the mixed asset segment might be considered as multi asset products. But since the term multi asset fund has been introduced more recently, investors might expect more from these products. With regards to this, modern multi asset products do invest without any restrictions in bonds, equities, commodities, as well as currencies and have in some cases also the possibility to do short trades.
As the management of a multi asset portfolio is very complex and requires different skills within different market segment, some fund managers do act as manager of managers and split up the different task in the portfolio between specialized teams, like a currency overlay team which manages the currency exposure of the portfolio, while other managers in the team might be responsible for the overall duration of the bond portfolio or do hedges on single markets or segments. With regards to this, it is key that the manager has the systems in place to monitor the overall exposure and risk of the portfolio to achieve the investment targets.
As shown above, the management of a multi asset fund is a highly complex task and investors in these products need to ensure that the manager which they have chosen has a suitable investment process in place and do have a strict risk management approach to ensure that the portfolio is managed in line with the portfolio guidelines.
From my point of view, investor should split the manager risk by choosing more than one manager, i.e. investing in two or more funds. Even as these kind of funds are normally highly diversified, investors should make sure that the respective managers do follow a different investment approach, so that the overall portfolio of the investor can enjoy the benefits of diversified range of performance drivers.
With regards to the success of these products in Europe, the fund promoter need to make sure that their products do deliver the returns which are expected by the investors, since another negative investor experience might lead to massive outflows from mutual funds at all, since the investors might lose their trust in the industry at all.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.